Meet the Kid Who Goes Toe To Toe With Warren Buffett

Taking the opposite approach, Wilmot H. The Kid III has racked up one of the greatest long-term track records in the history of investing.

Kids Central Securities Corp., a closed-end fund, has outperformed Warren Buffett’s Berkshire Hathaway Inc. over the past 20 years. In the last 25, 30, 40 and even almost 50 years under Mr. Kidd, Central Securities has performed brilliantly. beat the S&P 500.

The key to his success? Patience, concentration and courage.

On 31 December, Mr Kidd, 80, will step down as Central’s chief executive, although he will remain chairman. The fund has assets of $1.3 billion.

Don’t feel bad if you’ve never heard of Mr Kidd. He doesn’t have a LinkedIn page; Barely even a picture of him can be found online. He feels that my recent conversation with him is his fifth interview in his half-century-long career.

But Mr. Kidd is a model for thinking about and practicing wise investing.

In 1962, business historian Alfred D. Chandler wrote that “unless structure follows strategy, inefficiency results.”

In most asset managers, strategy follows structure instead. As a result, the fund owns too many stocks, trades too frequently and charges very high fees.

No wonder most active managers underperform market-tracking index funds that charge a fraction of their fees.

At Central Securities, Mr. Kidd ensured that the structure followed the strategy with astonishing results.

If you had invested $10,000 in central securities at the end of March 1974, when Mr. Kidd officially took office, you would have approximately $6.4 million by the end of this October, according to the Center for Research in Security Prices. The same amount put in shares in the S&P 500 would have grown to $1.9 million. Central securities rose 14.5% annually with dividend reinvestment, versus 11.7% for S&P 500 stocks.

That doesn’t mean Mr. Kid has never underperformed. Over the past 10 years, according to Morningstar, Central has outperformed the S&P 500 by an average of three percentage points annually as giant tech companies have moved on. (So ​​far in 2021, Central is doing better again.)

The firm was founded in 1929 as a closed-end fund. In that structure, new investors do not buy shares from the fund but from someone else. Cash doesn’t flood when shares are high, nor do investors demand their money back from the fund during bear markets. This enables a closed-end fund to manage its portfolio without having to manage its investors.

Central Securities is advised internally, meaning that Mr. Kidd and two of his co-managers, John Hill and Andrew O’Neill, work for the fund itself – not any management company that owns the fund. charges a fee. This year the fund spends at 0.54%, which is much lower than the average of other closed-end or mutual funds. (Mr. Hill will become chief executive on January 1.)

Mr. Kidd, his family and his Family Foundation own about 45% of the fund. “We’ve always said: We’re in business to make money for stockholders, not stockholders,” he says.

Portfolio managers brag about being “long-term” if they hold a stock for a year or so. Mr Kidd makes those guys look like day traders. They have often held stocks longer than many other portfolio managers. Central is owned by Analog Devices Inc., its second largest position for 34 years. Mr Kidd handled Murphy Oil Corp for more than four decades, from 1974 to 2018.

Over the past 15 years, Central’s annual portfolio turnover rate has averaged 11%. That means, according to Morningstar, it’s held its typical stock for about a decade — about six times more than the average active mutual or closed-end fund.

Owning a stock for years, rather than months, reduces the cost of trading, reduces the burden of researching new holdings and enables Central to deeply understand a business.

“We want to own as many growing companies as possible during their growth period,” says Mr. Kidd. This enables compounding to work its magic.

“Learning to live with an idea takes time,” he says. “All these portfolio managers [who sell stocks within a year]I can’t believe they even know what they have.”

Second Way Central’s structure follows Mr. Kidd’s strategy: The fund does not hold short positions in hundreds of stocks. “We’ve always felt that you have to focus,” he says. “You have some big positions, you have a lot that works.”

According to Morningstar, the average actively managed U.S. stock fund holds at least 160 stocks and its top 10 holdings account for only a third of its assets. Central holds 33 positions, with its 10 largest holding fully 57% of the money.

Isn’t it risky? As Mr Kidd wrote in his 1978 annual report, “risk can be reduced through proactive and more in-depth knowledge of the problems of the companies in which we invest.”

Mr. Kidd’s stakes are not only big, but bold too: 22% of Central’s assets are in Plymouth Rock Company, a Boston-based auto and property insurer whose stock isn’t even publicly traded. Mr. Kidd met James Stone, the future founder of Plymouth Rock, when they were both working on Wall Street in the late 1960s. “He was very bright, and we kept in touch,” says Mr. Kidd. In 1982, Central Securities became the first outside investor in Plymouth Rock at a total cost of $3.5 million; Its remaining shares, which are worth $700,000, are on the fund’s books for $293 million.

Plymouth Rock is one of many bets taken by Central in private companies in the 1980s, in the early days of private equity and venture capital, before such deals flooded buyers as they are today.

By structuring the fund to follow a strategy of making big, focused bets on fewer companies, Mr. Kidd has taken advantage of broadening long-term trends.

From the mid to late 1970s, Central earned huge returns by investing in companies such as Murphy Oil, Cities Service Company and Ocean Drilling and Exploration Company, which together accounted for about 30% of the portfolio.

But Mr. Kidd was also open to new ventures. Around 1969, he was a young investment banker at Hayden, Stone & Company and helped draft a prospectus for a new company called Intel Corp. Although Intel delayed its public offering until 1971, Mr. Kidd learned of its co-founder Robert Noyce. and Gordon Moore.

This prompted Central to take the big spot a few years later among many rising technology stars of the day, including stocks such as Informatics General Corp. Through a small stake in a venture-capital fund, Central has an indirect stake in Compaq Computer Corp., and Mr. Kidd observed Plymouth Rock’s insurance agents using portable Compaq computers in the area.

“We could see that this was part of the revolution that Noyce and Moore started,” he says, “and that there was a serious commercial use for portable computers.”

By 1982, Mr. Kidd decided that the energy boom was mostly over. Within a few years, Central had pivoted from one-third of its assets in energy to one-third in tech stocks — and made big gains again.

When I ask Mr. Kidd whether he attributes his protracted success to luck or skill, he lets out a long, quiet, dry laugh before saying something I don’t think I’ll ever forget: “Skill You just have to recognize when you’ve got lucky.”

He explains, “It’s when you’ve been lucky enough to invest in a great company, and suddenly you realize how lucky you were, and you buy more. That’s skill, I think.” That—and holding on to what you have and not coming out.”